Pandemic concerns set to push European stocks sharply lower

European markets finished lower last week as concerns about the spread of coronavirus took the edge off the record highs seen earlier in the week in the DAX and Stoxx600.

There had been plenty of talk that Chinese companies were slowly returning to work, as hopes rose that the Chinese authorities appeared to be finally getting a handle on the rise in new infections.

This optimism proved fleeting as reports of the virus spreading elsewhere through Asia, raised concerns that we could be starting to see the beginnings of a global pandemic, with authorities seemingly at a loss to explain how or why the virus is spreading, particularly in Europe.

Sharp increases in cases being reported in Japan and South Korea where authorities have started to close schools and other public buildings started to sow some early jitters on Friday, and this weekend’s reports of outbreaks in Italy and France aren’t helping as we begin a new week, with markets in Europe set to open sharply lower after big falls in Asia. South Korean markets were especially hit after the government raised the threat level to the highest level, as further cases came to light over the weekend.

In Italy authorities there have imposed a strict quarantine in the northern part of the country after the infection count rose above 150, as well as cancelling the Venice carnival.

With further outbreaks likely to continue across the world, and Iraq and Turkey closing their borders to Iran after cases being reported there, financial markets could well have to get used to an extended period of uncertainty, as consumer behaviour globally starts to change.

There is already evidence that this is happening, with Chinese tourist numbers down across the world, while the French finance minister said that tourist numbers in France were already down over 30% at this weekend’s G20 finance ministers meeting.

Finance ministers and central bank chiefs did pledge to continue monitoring events and take action to address the risks of a pandemic induced slowdown of the global economy.

This sounds all well and good, however it remains to be seen what if anything central banks or governments can do to mitigate a threat such as this.

All traditional methods of containing a virus tend to stop economies in their tracks in the form of isolation and quarantines, and while technology and remote working can offset some of that, a global pandemic could well last for months, and modest cuts in interest rates and fiscal stimulus won’t do much to change that.

Gold prices, which have already been rising of late, has continued its move higher, pushing above the $1,660 level for the first time since 2013.

Last quarter, both the economies in Italy and France contracted, while we saw stagnation in Germany. The last thing Europe needs is further economic disruption, unfortunately this looks the way events appear to be unfolding.

After last week’s better than expected German PMI numbers the question being asked is whether the rebound being seen in German PMI’s is real, or just an illusion. This month’s sharp drop in ZEW sentiment could be a precursor to a sharp drop here, though the continued resilience in PMI’s suggests that for now coronavirus concerns haven’t quite reached Europe yet.

Recent IFO business surveys have showed that there is some optimism out there, with the index hitting a six-month high in December, however the January number saw a bit of a setback. The sharp falls seen in recent factory output data, along with the coronavirus outbreak might see further softness in today’s latest number.

EURUSD – still finding support in the April 2017 gap between 1.0730 and the 1.0780 area. This gap level support needs to hold to prevent a slide towards 1.0340. We need to get above 1.0880 to stabilise and argue for a move back to 1.1000.

GBPUSD – found support at the 1.2850 area last week but needs to move above 1.3080, which is the 50-day MA and trend line resistance from last December’s highs. We need to move beyond here and stabilise or risk further losses towards 1.2700.

EURGBP – found a short-term base at the 0.8280 level last week, and three-year lows, and this needs to hold to delay the prospect of further losses towards 0.8120. We currently have short term resistance at the 0.8410/20 level with further resistance at the 200-day MA at 0.8480.

USDJPY – saw a big surge to 112.25 last week before falling back. This is a big area of resistance as it is also near the April highs of last year at 112.40. This is the next key barrier and obstacle to a move towards the 114.80 area. Support currently comes in at 110.20 break out area and below that at the 108.50 area.

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